7. Suppose you are considering subscribing to Economic Analysis Today magazine.

Question

7. Suppose you are considering subscribing to Economic Analysis Today magazine. You are offered a one-year subscription for $60 or a two-year subscription for $115. Both options require immediate payment. You plan to keep getting the magazine for at least two years, and the advertisement says the two-year subscription saves you $5 compared to two successive one-year subscriptions. If you choose one-year subscription, another $60 will be due in one year. If the interest rate is 15%, should you subscribe for one or two years?

Explanation / Answer

Answer

If I go for 2 year subscription then I must pay $115 . If I choose 1 year subscription then I need pay $60 immediately for 1 year,and $ 60 at next year for next year's subscription.Interest rate is 15%.

So, the opportunity cost of go for 2 year subscription is = $60*0.15= $9 which is more than future loss which is $(120-115)=$5 for going for two year subscription. As a result I will choose 1 year subscription for that magazine

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